Advertisement
UK markets close in 4 hours 38 minutes
  • FTSE 100

    7,952.37
    +20.39 (+0.26%)
     
  • FTSE 250

    19,862.88
    +52.22 (+0.26%)
     
  • AIM

    743.40
    +1.29 (+0.17%)
     
  • GBP/EUR

    1.1696
    +0.0027 (+0.23%)
     
  • GBP/USD

    1.2617
    -0.0021 (-0.17%)
     
  • Bitcoin GBP

    55,961.93
    +275.71 (+0.50%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • S&P 500

    5,248.49
    +44.91 (+0.86%)
     
  • DOW

    39,760.08
    +477.75 (+1.22%)
     
  • CRUDE OIL

    82.44
    +1.09 (+1.34%)
     
  • GOLD FUTURES

    2,227.90
    +15.20 (+0.69%)
     
  • NIKKEI 225

    40,168.07
    -594.66 (-1.46%)
     
  • HANG SENG

    16,541.42
    +148.58 (+0.91%)
     
  • DAX

    18,477.80
    +0.71 (+0.00%)
     
  • CAC 40

    8,221.97
    +17.16 (+0.21%)
     

Is Arista Networks Inc (NYSE:ANET) A Sell At Its Current PE Ratio?

This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in Arista Networks Inc (NYSE:ANET).

Arista Networks Inc (NYSE:ANET) is currently trading at a trailing P/E of 41.3x, which is higher than the industry average of 31x. While ANET might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Arista Networks

Breaking down the P/E ratio

NYSE:ANET PE PEG Gauge June 22nd 18
NYSE:ANET PE PEG Gauge June 22nd 18

P/E is a popular ratio used for relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.

ADVERTISEMENT

P/E Calculation for ANET

Price-Earnings Ratio = Price per share ÷ Earnings per share

ANET Price-Earnings Ratio = $273.8 ÷ $6.634 = 41.3x

The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to ANET, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 41.3x, ANET’s P/E is higher than its industry peers (31x). This implies that investors are overvaluing each dollar of ANET’s earnings. Therefore, according to this analysis, ANET is an over-priced stock.

Assumptions to be aware of

Before you jump to the conclusion that ANET should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to ANET. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with ANET, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing ANET to are fairly valued by the market. If this does not hold true, ANET’s lower P/E ratio may be because firms in our peer group are overvalued by the market.

What this means for you:

Since you may have already conducted your due diligence on ANET, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for ANET’s future growth? Take a look at our free research report of analyst consensus for ANET’s outlook.

  2. Past Track Record: Has ANET been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of ANET’s historicals for more clarity.

  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.